WHY START A SEARCH FUND?
“I need to have a job where I have ownership and a seat at the table to feel engaged…I am basically unemployable.”
- Current Search CEO
With the growth in the search fund ecosystem, I sometimes wonder if more folks are getting drawn into the career path for the wrong reasons, as the wave of popularity moves smart young business students and executives from banking, start-ups, PE firms, and general management to our shores. I used to take a call from just about anyone looking for information about search, but the numbers have made that impossible at this point. So, I decided to write this post as a good place for folks to start.
I have my own views on what might be good and not-so-good reasons for starting a search fund. But I decided it would be far more informative to ask a sampling of current searchers and search CEOs about their motivations at the outset, what career alternatives they gave up to search, what they got wrong in their thinking, and what motivates them now as they search or run their company. Some of their answers might surprise you, and, if you are considering a search, make you think hard about why to jump in…or not.
It’s NOT All About the Money
For those looking to bank big cash in a hurry, the search fund route is not the answer. Cash comp during the two-year search will not make your rich. Cash comp as CEO is better, but it is still well below average for the same vintage graduates of top business schools. The game is one of patience where equity becomes valuable over a long period of time. Sure, there are examples of massive wealth creation. And certainly, one can make arguments about the attractiveness of the expected value of search outcomes based on the relatively narrow standard deviation in the Stanford Study.
But if you want to roll the dice on becoming a billionaire, start a company. And if you just want to big cash comp, work at a bank, hedge fund, or PE firm. Clearly, going the search route is about more than money. When I started talking to searchers, I realized just how much of their motivation was non-financial.
I asked everyone in my sample to put a percentage to financial vs. non-financial motivation (answers were anonymous, so no reason to hide the truth). The highest percentage I got for financial reward was 50% and the lowest was 20%. Most were in between the two. Even if you allow for some amount of exaggeration of the non-greed factors to make themselves feel better in this survey, at least half of the motivation going in was non-financial. Here is what they said.
I want to be building something rather than executing.
The learning curve and ability to directly impact the business were key decision factors.
I wanted to truly own my business.
Leading a small team environment in Iraq with U.S. servicemen and women, and Iraqi civilians, made me love entrepreneurship in a high-risk environment. In business school, I discovered the search fund model, and I wanted to replicate leading a small company to success.
Being the captain on the wheel of the ship was the reason for choosing this specific path.
Getting leadership experience. I wanted to put my knowledge and prior experience to work by having the experience to lead a company with all its challenges, but also with an investor base that will help me through the process.
Start a life project, something I could do for the very long term and be proud of, and over which I'd have autonomy
I wanted to have a stake in whatever was going to be my day-to-day activity.
Find a way to leverage my contribution to others' professional success.
Create a culture of talent attraction, development, and retention outside of traditional professional service firms in my country.
Continue challenging myself and growing so I may better help others.
I want to do meaningful work/apply all the things I've learned at b-school to make a real impact.
After working in investment banking during the Great Recession and living abroad co-managing a management consulting practice for a Big 4 accounting firm, I felt a calling to come back to the USA, pursue my entrepreneurship dreams that I honed in business school, and help fellow Americans get jobs.
Even if I don’t make a significant amount of money in the search fun, I am convinced that after this process I will be better off to build something of my own with long-term value.
I thought the best alternative to leverage my skills and experience in PE/Startups was to take an existing business and transform it.
The whole idea of office politics/corporate 'stuff' makes me sick.
What Did Searchers Give Up to Search?
The bulk of searchers are coming directly from business school, so they proactively have to make a career choice. Most of those coming from industry are switching from fields that the business school students gave up to start a search fund. The theme of financial and non-financial trade-offs came up here too, again and again.
Here is what they both said about why they gave up the other options on the table:
I just came from doing a start-up that had some success, but the math is hard.
My reason to take SF over startup was mainly the understanding that the SME market in my country is under-developed and getting into it together with a capable and experienced team of investors could be a smarter way to achieve these goals than pursuing the over-populated and over-priced tech world.
I would have been taking on more risks and making less money.
After learning about the SF model, it just made much more sense to go on that path. Startups suddenly looked much riskier and like a less smart option. In terms of financial reward, I guess we’ll see once I acquire a company. At this point, my colleagues are significantly more rewarded than I am now.
I don't feel like my skill set is the best for a startup, and I enjoy companies at a different stage more than at startup phase. My decision still feels very right for me.
I spent many years working at a PE firm, and I felt I was giving my time to somebody else instead of getting something of my own
I would be less happy but making more money.
I felt I would not grow in the direction I wanted. I would continue doing something similar as before and have, at most, a very small team of people to develop/lead.
My alternative was to go back to the private equity firm where I spent four years before pursuing my MBA. This is a respectable PE firm, and my comp would have been at least twice the average salary for searchers. I did not envision myself as a partner in that PE firm. Even though this is a respectable and top-tier PE firm in my country, I did not share some key values and principles with the partners at the firm. In the short term, I would have been making a decent amount of money for a post MBA, but five years down the line I would have been looking for other opportunities to build something of my own or partnering up with someone with whom I would share values and vision. My end goal is to build something of my own that I am proud of. Going back to the PE firm would have made it harder for me to reach that goal.
My second option was going back to PE, which obviously meant better cash compensation. However, I decided not to go back because of two reasons: 1) I wanted to control my own time, and 2) I wanted to build value for myself and not just for someone else. My motivation to go to work every day is completely different since I feel that I am creating value for myself.
I would be less happy and making the same amount of money.
The alternative career I gave up was a direct route to Partner status in management consulting. Another was Managing Director at an investment bank. A major factor in deciding not to continue in management consulting and investment banking, and hence launching a search fund, was a growing disdain for corporate America (or multi-national companies. While at present I make less money than my peers do (presently in the search phase), I believe the search fund experience better aligns with my personal objectives at this stage in my life.
A flattening learning curve brought me to leave banking.
Which Motivations for Going into Search Turned Out to Be Wrong?
I was interested to ask current searchers (all at least a year into their search) or current search CEOs, which of their motivations for going into a search fund had turned out to be WRONG? Here is what they told me:
Where was I wrong – this is easier and more tangible than a start-up. That said, my work challenges and stresses are much higher than my friends who are in their late 30s at a good PE fund, and they have significant wealth creation opportunities, so that looks easier today (grass might just be greener).
After getting deep into the SF world, you understand that the financial reward is much lower than expected, and the hurdles for the entrepreneur to get just an OK outcome are much higher than I anticipated.
Searching for an acquisition and running the business are two different animals. Almost all of my motivations were about the "running a business" stage, and I haven't bought one yet.
Quite often, especially after a deal falls apart, search feels like a grind/I don't necessarily feel like I'm doing something meaningful.
Sometimes it is really hard to go to work because there are no live deals, and I get frustrated when deal sourcing goes slower than I would like. I thought that the stress was going to be less than what I used to have in a PE firm, but I realized it is different because I have much more responsibility now.
My goal to find a business to help fellow Americans is proving difficult to execute. In our increasingly globalizing world, businesses are not so simple. In my search, I have discovered a lot of businesses that have cross-border operations, and that also increasingly use automation to avoid hiring additional workers. I haven't stopped looking at companies that can employ Americans, and as an example, have broadened my approach to include companies that either disproportionately employs or caters to U.S. veterans.
The "running your own business" part of things has been even better than I expected. But a lot more work as well. The hours so far have been much longer than I expected.
What is Your Biggest Motivation Now?
I asked folks who are searching or running a company what their biggest motivation is RIGHT NOW. Not what they thought it might be going in, but what gets them out of bed in the morning. Here’s what they said:
I love to be able to handle my agenda in the way I consider right. It is a sense of freedom that I had not experienced before.
I am in charge of my destiny for better or worse, and that feels great.
I get to apply my MBA toolkit.
At the company level, I get to decide what, when, how, where, and who. Employees look up to me in a positive way.
Building a small team that has become an elite searching unit with its own culture gives me a lot of satisfaction.
Do right by investors and be a good steward of their capital. Don’t fuck up.
I'm very motivated about building something for the long term, definitely thinking constantly about how to keep the search fund alive and turn it into a conglomerate of companies run by a partnership following a common set of management and cultural principles, based on talent attraction, development, and retention
I see the search as a bridge I have to cross in order to get to the place I want to be – running a business/doing meaningful work/making impact/building something. Getting there requires a lot of hard work, and it is entirely up to me. Every extra effort I make while searching gets me closer to getting a deal done.
A new, unexpected motivation is a desire to find a company that employs our most vulnerable Americans. This is not easy since so many robust businesses increasingly require high-skill expertise. But I have factored that into my search methodology.
I believe that my financial motivation has grown a lot as my search has advanced. I have seen great deals that we were not able to materialize, so now I am very motivated to find a deal that is extremely attractive for my future value. In the beginning, I had a number in mind that I thought was reasonable for a search fund. However, now that I have seen a few deals that easily surpassed that number, I have been analyzing deals with a different perspective and the financial motivation is significantly higher than it was at the beginning. Also, I have seen some awesome businesses with amazing people that I would love to have the chance to lead, and my motivation to find a fun business to acquire has also increased over time.
My most important motivation right now is that I am perfectly positioned to work as hard as I can to find and do something meaningful with my professional life. Through the search fund, I will be able to gain experience and end up well-positioned to create something valuable in which I will be a stakeholder. I believe that we have the unique opportunity to decide where to spend the prime of our careers doing something that truly excites us and motivates us every day.
Transform the business and the team to be great. Find ways to win.
A few folks offered up their greatest fear in the search fund process. Here is what they told me:
Losing investors’ capital.
In my case, the amount of personal responsibility I have over my firm. For example, if an employee suffers a fatal accident at work or your company catches on fire. These have very low probabilities, but no other career option puts you in this type of situation.
Selling the company at a price point where my equity is worthless.
I feel at some disadvantage compared to my classmates who have now 'graduated' from I-banking/consulting jobs into more interesting/family friendly/well-paid positions in GM or PE. If my search doesn't pan out, I'm not sure how marketable my 'search' skillset is. It seems that I might have to go back to opportunities that are available to freshly minted b-school graduates (at least that is what I hear from searchers who had to close their funds). On the other hand, I get inquiries from some of my classmates who are fed up with their jobs and are now interested in search funds. Compared to them, I feel like I am in a good spot!
Hopefully these tidbits from the front lines of search are a useful introduction.
Not surprisingly, there is no one type of person who is successful in the search fund ecosystem. The emphasis here wasn’t to try to examine what personality types and backgrounds led to more or less successful searchers. It was simply to get some raw data from current searchers and search CEOs about why they made the choice they did, what they gave up and why, what they now view as mistakes in their thinking, and what inspires them today.
My hope is that this peek into the mindset of current searchers will provide those contemplating a career in the ecosystem a place to start. If none of this scares you, the next step is to track down search funders yourself to talk to. Find folks who are in the middle of their search, who are search CEOs, and those that have sold their companies. Ask them tough questions. Figure out if this is really the right path for you before putting your PPM together and starting to ask investors for capital.
My own belief is that it is a uniquely cool and great path for many people.I need to have a job where I have ownership and a seat at the table to feel engaged…I am basically unemployable.”
- Current Search CEO